'The average tax rate is: equal to the marginal tax rate if the tax is progressive the total tax rate minus the marginal tax rate the ratio of total taxes paid to total taxable income: the tax rate that applies to incremental dollars of income.'
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Suppose in Fiscalville there is no tax on the first $$\$ 10,000$$ of income, but a 20 percent tax on earnings between $$$\$10,000$$ and $$\$ 20,000$$ and a 30 percent tax on income between $$\$ 20,000$$ and $$\$ 30,000$$. Any income above $$\$ 30,000$$ is taxed at 40 percent. If your income is $$\$ 50,000,$$ how much will you pay in taxes? Determine your marginal and average tax rates. Is this a progressive tax? Explain.
If the tax code exempts the first $\$ 20,000$ of income from taxation and then taxes 25 percent of all income above that level, then a person who earns $\$ 50,000$ has an average tax rate of _____ percent and a marginal tax rate of _____ percent. a. $15,25$ b. $25,15$ c. $25,30$ d. $30,25$
Tax economists often speak of lump-sum taxes, which are levied on individuals without regard to their economic activity. Lump-sum taxes are efficient because they impose zero marginal tax rates on all inputs and outputs. Assume that the government imposes a lump-sum tax of $\$ 200$ on each individual. Show the effect of this on the supply and demand for labor in a graph. Does the marginal revenue product of labor still equal the wage in equilibrium? In a lifetime framework, the dynamic equivalent of a lump-sum tax is an "endowment tax," which would tax individuals on the basis of their potential labor incomes. Would you favor such a change? Describe some of the difficulties in implementing an endowment tax.
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